Global reinsurer capital up despite falls in alternative capital: KBRA
Global reinsurer capital was up 7 percent to $625 billion in the first nine months of 2019, according to Kroll Bond Rating Agency (KBRA).
It cited Willis Re Securities figures that show traditional capital increased 9 percent to $532 billion. This offset a 4 percent decline in alternative capital to $93 billion, KBRA said.
KBRA estimates investor capital of between $15 billion and $20 billion is trapped due to losses incurred in 2017 and 2018 that are still adversely developing, with collateralised reinsurers worse affected than catastrophe bond issuers. “This has led investors to pull back from this asset class, with new issuance falling in 2H 2019,” KBRA said.
However, it predicted this segment of the reinsurance market will bounce back. “In the near term, KBRA expects an increase in catastrophe bond issuance as investors are more comfortable with the transparency and track record of this structure,” it said. “In the intermediate term, we expect collateralised reinsurers to evolve their business models to address shortcomings that surfaced due to recent losses.” This will increase transparency and lure back investors.
KBRA predicted that many highly rated large cap reinsurers will retake some of the market share they gave away during the soft market. “Despite top-line growth, these players are typically overcapitalised and we expect moderate capital repatriation in the form of dividends and share buybacks to continue,” it said.
Global reinsurers benefited from January 2020 renewals as they had the flexibility to reallocate capacity to hardening business lines, KBRA said.
However, it warned reinsurance buyers will increasingly scrutinise PartnerRe while the future of its ownership remained in doubt, which may affect renewals in April, June and July. “PartnerRe could lose some ground against the market leaders,” KBRA said.
More broadly, KBRA pronounced the end of the traditional insurance cycle.
“The traditional cycle is likely now consigned to the past, as market fragmentation continues to increase in line with transparency,” KBRA said. “What was an unusual market cycle over the last couple of years has become the new normal, with January 2020 renewals following the trend.”
KBRA noted that although natural catastrophe losses had declined in 2019, climate change ensured they would continue to rise in the long term. Reinsurers have adapted quickly to the changing market environment, although they appeared “somewhat disappointed as they anticipated an even firmer market,” KBRA added.
KBRA said: “While the overall pricing environment is positive, we note that prices in the non-proportional business, for example, are only back at levels seen in 2011.”
It warned that low interest rates remain “a persistent problem for both primary insurers and reinsurers,” though the resulting earnings pressure is not necessarily credit negative. “KBRA has observed better underwriting discipline as rates fall, a trend which continued in the January 2020 renewals,” it said.
